September 13, 2012 / 1:56 PM / 5 years ago

UPDATE 3-U.S. natgas futures end down, first loss in 4 sessions

* EIA natgas build in line with expectations, prices slip
    * Mild weather ahead for consuming regions for next 2 weeks
    * Record inventories, production seen limiting upside
    * Coming up: Baker Hughes rig data, CFTC trade data Friday

 (Releads, adds analyst quote, updates with closing prices)
    By Joe Silha
    NEW YORK, Sept 13 (Reuters) - Front-month U.S. natural gas
futures ended lower on Thursday for the first time in four
sessions, hit by a profit-taking pullback after recent gains
despite a government report showing a weekly inventory build in
line with market expectations.
    The U.S. Energy Information Administration said domestic gas
inventories rose last week by 27 billion cubic feet to 3.429
trillion cubic feet. 
    Most traders viewed the build as neutral, noting it was in
line with the Reuters poll estimate of 28 bcf. 
    Traders said lingering production cuts from Hurricane Isaac
last week and strong air-conditioning demand likely slowed
injections. It was the nineteenth time in the last 20 weeks that
the build fell short of the seasonal norm.
    While the build, which was well below last year's gain of 80
bcf the five-year average increase for that week of 72 bcf,
could have been seen as supportive, traders seemed to focus
ahead to coming reports which should show higher injections.
    Front-month gas futures on the New York Mercantile
Exchange ended down 2.6 cents, or 0.8 percent, at $3.037 per
million British thermal units after climbing overnight to a
five-week high of $3.07, then sinking to an intraday low of
$2.96 right after the EIA report. 
    Prior to the release of the weekly storage data at 10:30 
a.m., the front month was trading in the $3.02 area.      
    "I was surprised they tried to press it - the build was
reasonable in terms of expectations - but this was a corrective
move after three straight higher closes. I'm still bullish,"
said Steve Platt, analyst at Archer Financial in Chicago.
    Platt expects prices to edge up as the peak-demand winter
heating season nears.
    Front-month gas prices have been on a tear this week,
spiking more than 14 percent in the previous three sessions on
technical buying and expectations for Thursday's light inventory
build. It was the biggest three-day gain in nearly three months.
    But one problem for price bulls is that inventories are
still at record highs for this time of year, and the pace of
storage builds going forward is likely to pick up sharply, with
most shut Gulf production now restored and air conditioning
demand tapering as summer temperatures fade.
    In its 6 to 10 day and 11 to 15 day outlooks, private
forecaster MDA EarthSat expects temperatures for most of the
eastern two-thirds of the nation to average normal or below
    Domestic gas production too is flowing at or near an
all-time peak, promising to keep the market well supplied.
    In addition, most analysts agree that if gas prices continue
to push above $3 some utilities, that have been using cheap gas
rather than coal to generate power, could switch back.
    A loss of that utility demand, which helped prop up prices
this summer, could lead to bigger weekly storage builds and
renew concerns about inventories climbing to near capacity
before winter.
    While record heat this summer helped cut a huge storage
surplus to last year by more than 60 percent from its late-March
peak near 900 bcf, traders noted that stocks are already 81
percent full, according to EIA's revised 4.239 tcf estimate of
storage capacity released on Wednesday. 
    The weekly build sliced the surplus to last year by 53 bcf
to 342 bcf, or 11 percent above the same week in 2011. It also
cut 45 bcf from the excess versus the five-year average,
reducing that surplus to 284 bcf, or 9 percent.     
    (Storage graphic: 
    But total stocks are hovering at a level not normally
reached until the first week of October, and still offer a huge
cushion that can help offset any weather-related spikes in
demand or Gulf Coast supply disruptions from storms.
    Early injection estimates for next week's EIA report range
from 40 bcf to 71 bcf versus a year-earlier build of 89 bcf and
the five-year average increase for the week of 73 bcf.          
    Concerns remain that the inventory overhang will pressure
prices this autumn if storage caverns fill to near capacity and
back more natural gas onto the market.

    Traders were waiting for the next Baker Hughes drilling rig
report on Friday. While the gas-directed rig count has fallen in
14 of the last 16 weeks to a 13-year low, traders say there is
little evidence so far that gas output is slowing. 
    (Rig graphic: )
    Dry gas drilling may be largely uneconomical at current
prices, but the associated gas produced from more profitable
shale oil and shale gas liquids wells is likely to keep gas
production at a record high for a second straight year.
    In its short-term Energy Outlook on Tuesday, EIA slightly
raised its estimate for gas production this year, expecting
total output in 2012 to climb to a record 68.86 bcf per day. The
agency trimmed its estimate for total demand. 

 (Additional reporting by Eileen Houlihan; Editing by David
Gregorio and Sofina Mirza-Reid)

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